The Indian securities market regulator, the Securities and Exchange Board of India (SEBI), has announced new constraints on the investment parameters for mutual funds. These alterations aim to enable a more transparent and efficient investment environment by mandating that all mutual fund schemes can only invest in listed debt or equity. Simultaneously, SEBI’s modifications also transform how security valuation in debt funds operates.
Mutual Fund Investment Norms
The SEBI now mandates all Mutual Fund schemes invest strictly in listed debt or equity. In doing this, the regulator seeks to provide an increased level of transparency and to ensure that all investments are subject to public scrutiny in real-time. This move follows a trend towards greater regulatory oversight in the interest of investor protection.
Security Valuation in Debt Funds
In a significant shift from previous practices, the valuation of securities in debt funds will now be based on a mark-to-market basis instead of the former practice of using an amortisation-based model. The mark-to-market technique reflects the current market value of the securities, thus providing a more accurate representation of their hypothetical liquidation value at any given point in time. This move is aimed at providing investors with a more realistic measure of the assets within their portfolios.
Changes to Liquid Fund Investments
Additionally, the SEBI has imposed limitations on the concentration of investments in Liquid Funds. Liquid Funds, essentially debt mutual funds investing in short-term securities, can now place a maximum of 20% of their asset base in one sector. This reduces the previous cap of 25%, aimed at mitigating risks associated with higher exposure to a single sector. Also, Liquid Funds are now required to retain at least 20% of their assets in cash equivalents for managing sudden redemptions.
Additional Information
| Investment Type | Definition | Requirements/Constraints |
|---|---|---|
| Mutual Funds | A pool of funds collected from various investors and invested in securities on their behalf, with a small management fee. | Can only invest in listed debt or equity. |
| Liquid Funds | These are debt mutual funds that invest in short-term (up to 91 days maturity) securities. | Max 20% investment in a single sector, must hold 20% of assets in cash equivalents. |
Mutual Fund and Liquid Fund Overview
A mutual fund collects capital from various investors and employs it to purchase a diversified portfolio of securities (debt, equity, or a mix of both). This strategy offers investors an affordable avenue to access professionally managed, diversified portfolios. Mutual funds impose a nominal management fee for this service.
Meanwhile, liquid funds fall under the broader umbrella of debt mutual funds. These funds channel investments into short-term securities with a maturity period not exceeding 91 days. Their primary purpose is to offer investors an opportunity for earning returns, without significant risk, during shorter investment horizons. To ensure liquidity, they maintain a part of their asset base in easily convertible cash equivalents.
